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Other Budget Issues

Last Updated: 1/23/2011
Budget Issue: Reduce Medi-Cal Provider Payments by 10 Percent
Program: Department of Health Care Services
Finding or Recommendation: Recommend the Legislature: (1) approve rate reductions pursuant to a study, (2) require department to report at budget hearings on the likelihood of federal approval as well as the implications of recent lawsuits and court actions, and (3) require the department to establish a process for establishing fee for service rates.
Further Detail

Medi-Cal Payment Reductions May Be Risky


The budget estimates that Medi-Cal will spend about $28.9 billion all funds in the current year for so called fee-for-service (FFS) care, including $1.6 billion for physician services, $13.5 billion for hospital inpatient services and $5 billion for nursing facility services.  In addition, the budget estimates Medi-Cal will provide about $10.7 billion all funds in premium payments to health plans for beneficiaries in managed care that indirectly pay for physician, hospital, and other services in 2010-11.

Medi-Cal Provider Reimbursement Generally Low. Over the past several years, many Medi-Cal providers have generally not received rate increases for their services despite significantly increasing health care costs.  According to a study published in a 2009 issue of the journal Health Affairs, Medi-Cal physician FFS reimbursements on average were about 56 percent of what Medicare pays to its providers for a variety of services including primary care, hospital visits and surgery. In addition, relative to other state Medicaid programs, Medi-Cal pays physicians on average at about 83 percent of the national average. 

Federal Medicaid Requirements Related to Payment for Services. Under federal law, state Medicaid programs are generally given substantial flexibility in determining provider payment amounts provided that they meet certain broadly defined requirements.  In particular, states must meet requirements outlined in what is commonly known as the “Equal Access Provision” of the Social Security Act (SSA). This provision generally requires that the state Medicaid plan must “assure that payments are consistent with efficiency, economy and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.”

Prior Payment Reductions Blocked By Courts. In recent years, the Legislature has enacted payment reductions for many Medi-Cal providers that generally ranged from one to 10 percent. In response, several lawsuits were filed challenging some of these reductions. As a result, the courts enjoined California from implementing many of them.  In some cases the courts found that the state did not study how these reductions impact the state’s compliance with federal requirements under the SSA.  Thus savings from many of these payment reductions had not been realized at the time this analysis was prepared. On January 18, 2011, the U.S. Supreme Court indicated they would hear some of these cases. There may not be a decision until fall of 2011 or later.

Governor’s Proposal

The Governor’s 2011-12 budget proposes to reduce almost all Medi-Cal provider payments including hospitals, skilled nursing facilities and physicians by a total of ten percent beginning June 1, 2011. This also includes reductions to managed care plans which will be incorporated into 2011-12 capitation rates. Figure 1 below lists the affected providers and the amount of the proposed decrease by provider type. Excluded providers include Federally Qualified Health Centers and Rural Health Clinics. Collectively, the proposed reductions are expected to achieve General Fund savings of about $9.9 million in the current year and $727.3 million in the budget year. (These amounts are based on recent estimates provided by the Department of Health Care Services). At the time this analysis was prepared the administration had not provided draft statutory language to implement the proposal. However, the department states that it intends to conduct a study to substantiate any provider payment reduction prior to implementation. The budget assumes a March 1, 2011 enactment date.


Figure 1      
Governor's Budget Proposes Provider Payment Reductions  
General Fund Effecta/      
In Millions      
Medi-Cal Service Category 2010-11 2011-12  
Long Term Care Facilities b/               0.9            227.0  
Pharmacy               5.7            151.9  
Managed Care Plansc/                 -              148.6  
Physicians               0.4              55.0  
Other Medical d/               0.4              38.4  
Outpatient Services               0.2              26.2  
Dental               1.8              21.6  
Other Services e/               0.4              21.3  
Adult Day Health Care f/               0.2              17.0  
Home Health                 -                 8.5  
Medical Transportation               0.1               7.4  
Hospitals                 -                 4.5  
Total  $            9.9  $        727.3  
a/ Based on updated estimates received from the Department of Health Care Services. Further updates may be pending.
b/ These savings amounts include reductions in state General Fund due to lost revenue collections from fees imposed on certain long term care facilities.
c/ LAO estimate based on the 2010 November Medi-Cal local assistance estimate.
d/ Includes services such as clinical labs, physical therapists, optometry, clinics, etc.
e/ Includes services such as Early Periodic Screening, Diagnosis and Treatment, hospice, portable x-rays, blood banks, hearing aid dispensers.
f/ The administration also proposes elimination of Adult Day Health Care.  

Analyst’s Comments

Payment Reductions May Impact Beneficiary Access to Care. There is some evidence that provider reimbursement could affect provider participation in the Medi-Cal program and therefore beneficiary access to care. In addition, access issues may drive more expensive care.  For example, if primary care physicians are unwilling to accept Medi-Cal reimbursement beneficiaries may have trouble accessing care in a physician’s office. If primary physicians are unavailable, these beneficiaries may seek care in more expensive emergency room settings.

Federal Approval of Prior Rate Reductions Denied. In a November 2010 letter to the state, the federal Centers for Medicare and Medicaid Services (CMS), the administering federal agency of the Medicaid program, denied California’s request for state plan amendments (SPAs) for payment reductions enacted in prior years.  The CMS cited concerns related to access to care and the state’s ability to meet federal requirements.   According to the CMS letter, national data suggests that access to care may be an issue for Medi-Cal beneficiaries.

State Continues to Lack A Rational Basis for Setting FFS Rates. The department has no regular process in place for the periodic evaluation of the adequacy of many provider rates or for periodically adjusting them.  In general, reimbursement adjustments have been adopted on an ad hoc basis. In a 2001 LAO report, we recommend that the Legislature establish a more rational process for setting, reviewing and adjusting physician rates for the Medi-Cal program. We outline issues related to this ad hoc process and rate changes in several prior LAO publications including a February 2001 report entitled A More Rational Approach To Setting Medi-Cal Physician Rates, Analysis of the 2002-03 Budget Bill, and more recently in our Analysis of the 2008-09 Budget Bill.

Estimated Savings May Not Be Realized. Given recent court rulings regarding prior payment reductions, we believe that the estimated savings may not be realized. For example, the federal Supreme Court may not rule in the state’s favor on key legal challenges.

LAO Recommendations

Approve Reductions Pursuant to a Study.  We recommend the Legislature approve payment reductions of up to 10 percent pursuant to completion of a study that assesses the impact of payment reductions on access to care and other federal program requirements. We believe conditioning the amount of the reduction on the results of the study would likely address some of the courts concerns related to access to care issues. A study would likely address some of the concerns we have raised in prior analyses about access to care. While we have recommended against similar rate reductions in prior years due to a variety of concerns including impacts on access to care, we recommend the Legislature consider these proposals given the state’s fiscal condition and limited options to achieve savings in the Medi-Cal program.

Require Department to Report at Budget Hearings. Given the somewhat risky nature of these proposals, we recommend the Legislature direct the department to report at budget hearings on the following key issues:

  • Likelihood of Federal Approval. We recommend the Legislature direct the department to report at budget hearings on their communications with CMS regarding the requests for SPAs to implement prior reimbursement reductions including any analysis the department has done supporting such reductions.
  • Implications of Lawsuits and Court Actions. We recommend the Legislature direct the department to report at budget hearings on the status of recent provider payment related lawsuits and court actions including the implications of the recent U.S. Supreme Court ruling to hear some of these cases.

Require Department To Establish a Process for Establishing FFS Rates. We continue to recommend that the Legislature enact Legislation to require the department to establish a process for establishing, reviewing, and adjusting  Medi-Cal FFS physician rates. We believe this process should be considered for other FFS providers as well.